The return on a repo, i.e., the interest earned by the lender (repo buyer) in a repo transaction. It is the amount of money paid on the cash that is lent out to the borrower (repo seller) or the party posting the collateral. In essence, it is a money market rate corresponding to the repo maturity. This rate, in turn, is a function of the base rate (published by a central bank) and the supply/ demand in the money market and repo market. From the perspective of the seller (i.e., the amount paid by the seller), the repo interest is expressed as follows:
Repo interest = repurchase price – sale price
If the buyer waits till repurchase date, the repo interest is the full amount earned over the entire term. However, if there is an early termination option, the repo interest will be the interest accrued to termination date.
The repo interest is sometimes known as the repo rate. However, the two differ in the sense that the repo rate is the amount of interest (earned on a repo transaction) expressed as an interest rate on the cash leg of the transaction.
The repo interest is also referred to as repo return.
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